When the Confirming Bank Goes Insolvent — What Happens Next?

Intro

Confirmed LCs are designed to give exporters peace of mind — the comfort that even if the issuing bank or its country faces trouble, a confirming bank (often in the exporter’s own country) will step in and pay.

But what if the confirming bank itself goes under before documents are presented? This question, raised by Ts., is not just theoretical — it’s one of those rare but painful scenarios that test how well exporters understand the undertakings under UCP 600.

Let’s take a look.

Question

Dear Mr. Old Man,

We seek your expert opinion on the following situation:

The LC issued by Bank A states as follows:

• Field 41a: AVAILABLE WITH CONFIRMING BANK BY PAYMENT
• Field 49: CONFIRM

Bank B confirmed the LC and advised the same to the beneficiary.

The beneficiary shipped the goods and is prepared to present the documents. However, Bank B has become insolvent.

1. Should the beneficiary present the documents to the issuing bank for payment?
2. Can Bank A refuse to honour based on the reason that it has provided full cash cover to Bank B?
3. In case Bank A does not pay, how can the beneficiary have recourse to Bank B?
4. What if Bank B is not in the beneficiary’s country?

Thank you in advance for your valued opinion.

Best regards,

Ts.

________

Answer

Dear Ts.,

Thank you for your interesting and practical questions. The situation you’ve raised touches on one of the classic risks under confirmed letters of credit — what happens when the confirming bank, the party trusted to pay, suddenly goes under. Here are my comments:

1. Which bank should the beneficiary present the documents to?

Under UCP 600 Article 6(a), a credit available with a nominated bank is also available with the issuing bank.

Further, Article 7(a)(ii) provides that if a credit is available by sight payment with a nominated bank, the issuing bank must honour upon a complying presentation made to either the nominated bank or directly to the issuing bank, if the nominated bank does not pay.

In this case, Bank B is the nominated and confirming bank. Since Bank B has become insolvent, the beneficiary may present the documents directly to Bank A (the issuing bank) for payment. Bank A must honour if the presentation is complying.

Note that although the beneficiary may, in practice, retrieve the documents from one bank (the confirming or issuing bank) and re-present them to the other, such action may take time and lead to potential discrepancies such as late presentation or credit expiry. Therefore, the beneficiary should decide carefully where to make the initial presentation.

2. Can Bank A refuse to honour because it has provided full cash cover to Bank B?

No. Under UCP 600 Article 7(b), an issuing bank is irrevocably bound to honour from the moment it issues the credit.

The fact that Bank A has provided full cash cover to Bank B is an internal arrangement between the two banks and does not affect the beneficiary’s right to payment. Therefore, Bank A cannot refuse to honour on that ground.

3. What recourse does the beneficiary have against Bank B if Bank A does not pay?

Under UCP 600 Article 8(a), a confirming bank undertakes to honour upon a complying presentation made to it.

However, since Bank B is insolvent, the beneficiary’s recourse will depend on the bankruptcy or liquidation proceedings under the law of the country where Bank B operates. In practice, recovery may be slow and partial.

4. What if the confirming bank is not in the beneficiary’s country?

If the confirming bank is located abroad, pursuing legal action will be costly and time-consuming. The beneficiary should weigh the potential recovery against the costs involved — including legal fees, translation, and enforcement expenses.

Given these constraints, it’s often more practical to present directly to the issuing bank if there are signs of trouble with the confirming bank.

Final Thought

The confirming bank’s insolvency doesn’t extinguish the issuing bank’s obligation. Under UCP 600, the issuing bank’s undertaking remains independent and irrevocable. But timing is everything — in cases like this, the beneficiary must act quickly, ensure documents are complying, and choose the presentation route wisely.

One more point for beneficiaries to consider: the main reason for requesting a confirmed LC is to mitigate the risk of non-payment by the issuing bank and to cover country risk. If, at the time of receiving or agreeing to the LC, the issuing bank is a small institution in a country facing serious economic or political instability, the beneficiary would be well advised to insist on payment from the confirming bank and to make presentation directly to it whenever possible.

Of course, if the confirming bank itself later becomes insolvent, that protection no longer stands, and the beneficiary must rely on the issuing bank’s undertaking instead.

These comments are, of course, only for your reference. The beneficiary should make the final decision on where to present the documents based on the actual circumstance of the transaction.

Best regards,

Mr. Old Man